|By Lori Weisberg, The San Diego
Union-TribuneMcClatchy-Tribune Regional News
December 9, 2009 - Sunstone Hotels Investors Inc., which earlier this year grabbed headlines when it stopped making payments on its loan for the trendy W Hotel in San Diego, has now defaulted on a mortgage covering 11 additional properties, including three in central San Diego.
The decision by Sunstone is a reflection of the dire market conditions facing hotels, which are struggling to bring in revenue at a time when leisure and business travelers are sharply cutting back their spending.
The affected hotels are Courtyard by Marriott San Diego and Holiday Inn Express San Diego, both in Old Town, and the Holiday Inn in downtown San Diego.
Sunstone, which owns 40 largely upscale urban hotels comprising more than 14,000 rooms, is seeking to renegotiate its loan with Massachusetts Mutual Life Insurance Co., but it acknowledged in its third-quarter earnings report that it may not be successful in its effort to amend the loan. Sunstone defaulted on its Nov. 1 payment. The 11 hotels represent more than 2,500 rooms.
If the loan is not modified, Sunstone “may elect to surrender the hotels to the lender or cooperate with the lender’s appointment of a receiver,” the company stated last month.
In an e-mail yesterday, Sunstone Chief Financial Officer Ken Cruse emphasized that if the company were to surrender the hotel properties to the lender or a receiver, it only would do so voluntarily.
“Sunstone is a very well capitalized public company (we sit on over $400 million in cash and have no near term debt maturities),” Cruse said. “In cases where the value of a hotel no longer exceeds the value of its debt, and where cash flow from the hotel no longer supports debt service, we seek to restructure the debt to address one or both of these deficits (through either a write-down of the principal or a reduction in debt service).
“If the lender is unwilling or unable to restructure the debt, it may be in the best interest of our stockholders for Sunstone to give back the hotel in satisfaction of the debt rather than using our stockholders’ capital to fund future losses.”
While Sunstone has opted to default on mortgages for a number of its properties, it does not appear to be hurting financially. In October, it announced plans to go on a buying spree, pointing out that now is an opportune time to purchase undervalued properties. In order to raise capital, Sunstone said it would sell 20 million shares of its common stock, valued at that time at $7.20 a share.
As for the latest mortgage on which Sunstone defaulted, it is due to expire in 2011. The debt totals $246.3 million, while the 11 hotels it covers are estimated to have a net value of $258.8 million, as of Sept. 30. That valuation includes “good will,” an imprecise term that has to do with reputation and loyalty, said Alan Reahy of Atlas Hospitality Group, which tracks hotel defaults and foreclosures.
“Their strategy is, by cleaning up their balance sheet, they could go back to Wall Street to raise more money to buy some distressed assets,” Reahy said. “Most publicly traded companies want to increase their stock value, and you do that either by creating more profit or by eliminating debt. In this market they’re not creating more profit but they’re able to eliminate debt, and the market has applauded that.”
When the 258-room W Hotel fell into default this past summer, Sunstone had decided it was no longer worth the $65 million owed on the loan and certainly not the $96 million it paid for the property three years ago.
The W, now overseen by a receiver, remains in business, as do the three San Diego hotels covered by the mortgage now in default.
Lori Weisberg: (619) 293-2251; >
Lori Weisberg: (619) 293-2251;
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